The Impact of Technology on Böhm-Bawerk's Interest Theories

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    Prof. Murphy,

    One thought kept going through my head as I listened to the lectures on Böhm-Bawerk and his theory of interest: what impact does rapid technological development have on the soundness of his theories?

    I’m going from memory here, so I hope I don’t misstate the basic concept, but as I recall: one of Böhm-Bawerk’s explanations posits that an hour of labor today is always going to be more valuable than an hour of labor in the future. This is because one can engage in a more roundabout production process if the hour of lobor is expended today, So an hour of labor today will result in more products being produced in ten years than the same hour of labor being employed, say, eight years from today.

    But one thing I have learned from Tom Woods over the years is that the gradual accumulation of capital over time, coupled with the amazing rapid growth of technology and the Internet, makes each worker *more productive* as time progresses. To take a simple example: a farmer with a tractor can do far more in one day than the same farmer could do before the tractor was invented.

    This seems to undercut Böhm-Bawerk’s thesis that an hour of labor today is more valuable than an hour of labor in the future. With the rapidity of technological progress, I’d be willing to bet that most workers will be able to do far more in ten years with an hour of labor than they could do today.

    I wonder if this trend is having a long-term depressing impact on interest rates. If so, maybe the Fed’s actions in holding interest rates low is not as damaging as we might otherwise think? Because maybe the true market rate of interest is lowering over time as technological developments improve productivity at exponential rates?

    I am curious as to your thoughts. A quick scan of Google revealed no obvious articles discussing this phenomenon, but I assume I can’t be the first person to ask this question or have this insight.

    Thanks for your time.


    Interesting questions!

    Regarding BB’s claim: It’s a little tricky to see his point, but the *reason* an hour of 2017 labor is more physically productive than an hour of (say) 2027 labor, is that the former can be invested in a 10-year process. That means it can be integrated into a 10-year process of capital accumulation. So e.g. if you want to get water from the stream into your house, a short process is to cup your hands. A much longer process is to go make a shovel, then dig a trench, then build a bucket, etc.

    So, you are setting up a false dichotomy between BB’s view and Tom’s observation that labor is more physically productive in the future. The *reason* it’s more physically productive is that workers augment their labor with more capital equipment. It is the very process BB was describing.

    But you *have* made me stop and think about maybe describing his position a little more carefully, because I totally get what you’re saying. In isolation, there’s an obvious sense in which a marginal labor hour today is less productive than one in 2027.

    * * *

    On your other point, yes that is standard stuff in this literature. In fact Schumpeter went so far as to argue that capital would accumulate until interest rates hit zero. Mises criticized him for saying this (in Human Action). These links show you what I mean:


    Hi Patterico,

    I may be the one who has this “twisted”, but the way I hear the story is that the amount of money I make is related to (directly proportional to) the value of the good or service I produced with my hour of labor. In the future, that same amount of good will be worth less because of increases in “leverage” gained by technology….so if rather than money, I were able to take the actual good (now represented by money) I made today into the future, it would naturally be worth less because the amount of labor to create it then would be less.


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